Ask Strong Towns, Sales Tax

I read your blogs regarding cities being primarily sales tax funded. My question is how do you move away from that model? Given the property tax nose dive in our area in 2008 is property tax really a viable alternative? Are there other options? Thanks!

Unfortunately, most cities don't have the right to make this kind of decision. The state has made it for them, has defined the rules under which the local tax structure is established. To say that this has been done with the state's -- and not the local government's -- direct interests in mind would be stating the obvious.

For example, when we build the new interchange, we create a lot of instant growth. Jobs, new construction, etc... That's good for everyone, at least in the short term. Long term, local governments have to bear the cost of maintaining all of those miles of infrastructure to serve that new site as well as all the blocks of aging infrastructure in their now dilapidated downtown. The state continues to collect their revenue as long as people have jobs, do transactions and own property.

In short, state (and federal) governments have a predisposition to tax systems that create economic growth (transactions) because they are, in a sense, taxing the economy. Local governments, if left to their own devices, would mostly prefer tax systems that relied on wealth creation since a local economy is more nuanced and fragile that state/fed systems. The state takes on few long term commitments they can't walk away from, push come to shove. Local governments are all about long term commitments.

So, too bad; the state sets the rules. We're stuck with what they give us and that is, at least for the time being, a system that favors growth today over long-term wealth creation and stability.

There are a lot of implications to that. First and foremost is that cities are given every incentive to pursue short term growth at their own long term expense. If we pay someone to dig a ditch and then fill it back in, the economy has growth and -- according to some economists -- all is good, but we're right back where we started from. When we pay someone to widen a local short cut from two lanes to four lanes because traffic projections suggest we might have a congestion problem in the year 2035....well, now we have $9+ million in shortcut to maintain, but the state gets their growth all the same.

The second major implication is that it tilts the playing field (aka: the "market") away from local businesses and in favor of franchise businesses and national chains. You think Wal-Mart wants to deal with a different set of local tax in every little town? No way! They want one standardized set of regulations statewide -- something "efficient", a favorite buzzword of today's elites -- so not only can they run efficiently, but they only have one set of bureaucracies to navigate when they need a little relief.

While the local hardware store would gladly have a unique set of taxing standards customized to the nuances of the local community, that would kill Home Depot. And because of that, whether you are a logging town, a mining town, an agricultural community, a regional center, a manufacturing hub, a bedroom community, a major metropolitan area or a tourist trap, you have the same local taxing approach forced on you by the state, even though you have a dramatically different economy.

If you think that is crazy and self-destructive, you would be right.

So, in a related observation, when people like me argue for local control, we're not necessarily arguing for less government as much as we are arguing for different government, a system that would be more in touch with and more responsive to the actual needs of the community. This is another variation of the orderly but dumb versus chaotic but smart meme we've touched on here over the years.

So how do we move away from as sales tax model? In a practical sense, only by having the state change their approach. For places with the sales tax, that is going to be difficult. Sales taxes are the darling of governments because they (1) are fairly stealth in how they are applied and (2) are cash cows. The only thing more hidden and more lucrative would be a value-added tax. This means replacement with a more direct form of taxation -- a property tax or a land tax -- is going to be politically difficult.

What might be more palatable a political compromise would be a system that gave cities more options and let them decide for themselves without the state proscribing one specific approach. The state could keep its growth-oriented tax structure but allow cities to customize their own approach locally.

If cities had the opportunity to craft their own revenue structures, I would be open to a very complex set of taxes, fees and other usage charges that reflected, and enhanced, the local economy. A tourist destination would probably rely on lodging taxes, among other charges. A logging community would probably have a wheelage tax. This is how cities used to be operated. It wasn't perfect -- and it certainly wasn't efficient -- but it did allow a collection of citizens to craft a set of rules that best fit their place.